Financing

General Concepts

Financing exchanges present money for a promise of future repayment. The promissory note states the debt. A mortgage or deed of trust gives the creditor security in real property. Hypothecation means the borrower pledges the property without surrendering possession, while equity is the owner's value after liens are deducted.

The note rate determines interest charged under the note. APR expresses the broader cost of consumer credit as a yearly rate. Principal is the loan balance on which interest is calculated; the term is the repayment period. The federal disclosure called amount financed is a separate calculation that accounts for prepaid finance charges, so it need not equal the face amount of the note.

Lien priority usually follows recording order, summarized as first in time, first in right, subject to statutory priorities and agreements. Subordination deliberately moves an existing lien behind another. An assignment transfers the lender's interest. Reconveyance or a recorded satisfaction releases the security after the obligation is paid.

Read clauses by function. Acceleration makes the balance due after a stated event such as default. A due-on-sale clause permits acceleration after a covered transfer. A prepayment provision addresses early payoff. Reconveyance releases deed-of-trust security after performance. A buyer who assumes the loan promises to pay the debt; a subject-to buyer does not become personally liable merely by taking title. Lender consent, due-on-sale enforcement, and release of the original borrower are separate questions.

Loan-to-value ratio

Loan amount divided by the value the question directs you to use, commonly the lower of price or appraisal in a purchase-loan scenario.

Points

One point equals 1% of the loan amount. Discount points affect yield or rate; origination points compensate for making the loan.

Leverage

Use of borrowed funds to control an asset. It magnifies gains when returns exceed borrowing costs and magnifies losses when they do not.

Security

Property pledged behind an obligation. Security improves the creditor's remedy but does not replace the debt.

Priority

The order in which liens are paid from security. Recording, statutes, subordination, and notice can affect it.

Equity

Market value minus debt or liens. Equity can rise through appreciation, principal reduction, or both.

Usury

California limits interest on nonexempt loans. Exemptions include specified institutions and qualifying loans made or arranged by a licensed real estate broker and secured by real property.

Simple interest

Principal multiplied by rate and time. Use the time unit the question supplies and convert months or days carefully.

Usury depends on purpose and exemption

For nonexempt loans, California's constitutional written-agreement ceiling differs by purpose: personal, family or household loans generally have a 10 percent annual ceiling; other loans use the greater of 10 percent or the specified federal discount-rate benchmark plus 5 percent. For this rule, proceeds used primarily to purchase, construct or improve real property are not classified as personal, family or household use. Institutional exemptions and the exemption for qualifying real-property-secured loans made or arranged by licensed real estate brokers matter. Broker involvement does not exempt every unsecured loan or eliminate other lending laws.

Types of Loans

Classify a loan along more than one axis. A loan can be conventional or government-backed, fixed-rate or adjustable, fully or partially amortized, conforming or nonconforming, and secured by a first or junior lien at the same time. The labels answer different questions rather than competing for one slot.

A fully amortized loan pays all scheduled principal and interest by maturity. A partially amortized loan uses payments based on a longer amortization schedule than its term and leaves a balloon. An interest-only loan postpones principal reduction. Negative amortization occurs when the payment is smaller than accrued interest, so unpaid interest increases the balance.

An adjustable-rate mortgage uses an index plus a margin to determine the fully indexed rate, subject to contract caps. The index changes with the market; the margin is the lender's stated addition. Initial or payment rates can differ from the fully indexed rate, which is why the exam asks which number moves.

Purpose also creates loan types. Construction loans fund work in draws and may convert to or be replaced by permanent financing. Bridge loans cover a short transition. Purchase-money loans finance acquisition. Refinances replace existing debt. Home-equity loans provide closed-end financing secured by home equity, often as a junior lien, while a HELOC is open-end credit secured by the home.

Special structures include blanket loans covering more than one parcel, package loans covering real and personal property, wraparound or all-inclusive loans built around existing debt, seller carryback notes, reverse mortgages that convert equity into advances, and shared-appreciation arrangements that exchange favorable terms for a share of future value.

Conventional

Not insured or guaranteed by a government housing program. It may be conforming or nonconforming.

Conforming

Meets applicable purchase standards and loan limits for Fannie Mae or Freddie Mac.

Fixed-rate

The note rate remains fixed for the stated term, although taxes, insurance, or other escrowed costs may change.

Adjustable-rate

The rate can reset under an index, margin, adjustment period, and cap structure.

Balloon

A final payment larger than the regular installments because the balance was not fully amortized.

Reverse mortgage

An eligible homeowner converts equity into advances, with repayment generally deferred until a maturity event.

Blanket loan

One loan is secured by multiple parcels, often with a partial-release clause allowing individual parcels to be released.

Wraparound loan

A junior obligation includes an existing senior balance. Due-on-sale risk and servicing of the senior loan matter.

Purchase money is a category, not a description

Code of Civil Procedure 580b protects seller purchase-money obligations and qualifying lender purchase-money loans used to acquire an owner-occupied dwelling of up to four families. A qualifying refinance can preserve protection for the refinanced purchase-money principal under section 580b(b); new advances are not protected by that subsection except amounts used for specified refinance costs, fees, or related expenses. Do not assume every purchase loan qualifies or every refinance loses protection.

Sources of Financing

The primary mortgage market connects borrowers with originators. Commercial banks, credit unions, savings institutions, mortgage banks, finance lenders, insurance companies, private lenders, and sellers can supply or arrange funds. The institution's charter and license determine what it may do. Separate the source of a new loan from a later purchase or servicing transfer.

The secondary mortgage market buys or securitizes existing loans, returning capital to originators so they can lend again. It does not mean a second mortgage. Fannie Mae and Freddie Mac buy mortgages from lenders, hold some, and package others into mortgage-backed securities. Their underwriting and delivery standards influence the primary market.

Ginnie Mae has a different role. It does not buy individual mortgages for a portfolio. It guarantees timely payment on qualifying mortgage-backed securities backed by federally insured or guaranteed loans. That federal guaranty supports liquidity for FHA, VA, and other eligible government housing loans.

Private financing remains important. A seller may carry a note secured by the property. Individuals may invest in whole notes or fractional interests through a broker. Pension funds, insurance companies, and other institutional investors can supply long-term capital. Each source has different risk, liquidity, disclosure, and regulatory concerns.

Commercial bank

Depository institution that can originate and hold mortgages or sell them into the secondary market.

Credit union

Member-owned depository institution that lends to eligible members.

Mortgage bank

Originates loans, often using warehouse credit, then may sell loans while retaining or transferring servicing.

Mortgage broker

Arranges financing between borrower and lender rather than necessarily funding the loan from its own balance sheet.

Insurance company

Institutional source often associated with long-term real estate and commercial mortgage investment.

Seller financing

The seller accepts a note and security instrument for part of the purchase price.

Fannie Mae and Freddie Mac

Congressional-charter enterprises that buy qualifying mortgages and issue or guarantee mortgage-backed securities.

Ginnie Mae

Government corporation that guarantees qualifying securities backed by government-insured or guaranteed loans.

Government Programs

FHA does not ordinarily lend the purchase money. It insures qualifying mortgages made by approved lenders. The standard minimum required investment can be as low as 3.5% of adjusted value, subject to program and borrower requirements. FHA loans include upfront and annual mortgage insurance, and cancellation rules differ from conventional PMI.

VA guarantees part of a qualifying loan made by a private lender. Eligibility is documented through a Certificate of Eligibility. With full entitlement, sufficient value, and lender approval, many borrowers can purchase with no down payment. VA uses a Notice of Value, not the older Certificate of Reasonable Value label, and a funding fee may apply unless the borrower qualifies for an exemption.

USDA supports eligible rural housing through guaranteed and direct programs. A guaranteed loan is made by an approved private lender with federal backing. A direct loan is made by USDA to an eligible borrower under the program. Property location, household income, occupancy, and program underwriting matter.

California's CalVet program is separate from the federal VA guaranty. DRE's finance reference explains the traditional structure as California's Department of Veterans Affairs acquiring the approved property and selling it to the eligible veteran under a land contract of sale. California's current service page describes financing for an owner-occupied California home and says CalVet can combine state benefits with a qualifying borrower's federal VA benefit. Keep the program, structure, and federal guaranty distinct.

Government support does not waive underwriting, appraisal, property-condition, occupancy, or closing requirements. Insuring or guaranteeing protects the lender against defined loss. It does not guarantee that the borrower will never default or that the property price is a good investment.

FHA

Federal mortgage insurance for loans made by approved lenders, with program mortgage-insurance requirements.

VA

Federal guaranty tied to qualifying service and entitlement, commonly allowing no down payment when conditions are met.

USDA guaranteed

Private-lender rural housing loan supported by a federal guaranty.

USDA direct

Federal government is the lender for qualifying rural applicants under the direct program.

CalVet

California veteran financing program traditionally structured through a land contract of sale.

FHA mortgage insurance

Protects the lender. It is not conventional private mortgage insurance and follows its own duration rules.

VA entitlement

The amount of guaranty support reflected on the Certificate of Eligibility, not the borrower's maximum affordable loan.

Notice of Value

VA document stating the reasonable value determined for loan purposes under the current terminology.

CalVet is structurally different from a VA loan

Under the CalVet Home Loan Program the department buys the property and sells it to the veteran under a contract of sale, holding legal title until the contract is paid. A VA loan is an ordinary loan from a private lender with a federal guaranty behind it. The land-contract structure differs from the federal VA guaranty.

Mortgages/Deeds of Trust/Notes

Two documents do different jobs. The promissory note is the borrower's personal promise to repay. The security instrument pledges the property to secure that debt. An action on the note seeks personal liability; foreclosure enforces the security interest in the property. California's one-action and anti-deficiency rules limit when a creditor may pursue these remedies.

A deed of trust has three parties: the trustor is the borrower, the beneficiary is the lender, and the trustee has the limited title and powers needed to administer the security instrument. A mortgage has two parties, mortgagor and mortgagee. California commonly uses deeds of trust with a power of sale, but a mortgage can also contain a power of sale. Read the instrument and applicable law before deciding whether nonjudicial foreclosure is available.

Nonjudicial foreclosure uses the power of sale without a court foreclosure action. After the sale, the borrower has no statutory post-sale right of redemption, and the foreclosing creditor cannot collect a deficiency under Code of Civil Procedure 580d. Do not confuse post-sale redemption with rights to reinstate or redeem before the sale.

California also protects borrowers through anti-deficiency rules. The following statutes address different facts, so identify the loan, property, parties and foreclosure procedure before applying a rule.

Hypothecation

Hypothecation pledges property as security while the borrower retains possession. The lender has an enforceable security interest before default; default may trigger contractual and statutory remedies.

The non-judicial timeline

Ordinarily, at least three months follow recordation of the notice of default before the notice-of-sale process. Civil Code 2924 permits recording the sale notice up to five days before that period ends, but the sale cannot occur earlier than three months and 20 days after the default notice. Posting, publication, mailing and recordation have distinct deadlines. Reinstatement normally continues until five business days before sale; other protections can extend the overall process.

No redemption after a trustee's sale

A completed power-of-sale foreclosure does not give the former owner a statutory post-sale redemption right. Separate eligible-bidder procedures under Civil Code 2924m can delay finality for covered one-to-four-unit sales; those rights are not borrower redemption.

Judicial foreclosure runs the other way

Judicial foreclosure proceeds through court. When the property is sold subject to statutory redemption, the period is three months if the sale proceeds satisfy the secured debt and specified amounts, otherwise one year. Under Code of Civil Procedure 726(e), there is no post-sale redemption when a deficiency judgment is waived or prohibited. Judicial foreclosure can allow a deficiency only when the applicable protections do not bar one.

CCP 580b, purchase money

Section 580b protects seller purchase-money obligations and qualifying lender purchase-money loans for an owner-occupied dwelling of up to four families. Its protected refinance rule can preserve protection for qualifying principal, subject to statutory limits on new advances. Protection depends on the facts, not merely the label 'purchase loan.'

CCP 580d, after a trustee's sale

Section 580d bars the foreclosing creditor's deficiency after exercise of a power of sale. Do not assume that every other lien, debt or independently enforceable obligation is extinguished by that bar.

CCP 726, the one-action rule

A secured creditor must exhaust the security first, in a single action, before pursuing the borrower personally. A lender who sues on the note without foreclosing can lose the security altogether.

Reconveyance

After payoff, the beneficiary and trustee follow Civil Code 2941's reconveyance procedures. Recording the full reconveyance releases the deed of trust from title. This clears the security interest; it is not a purchase of ordinary ownership back from the lender.

Assumption against taking subject to

An assuming buyer agrees to personal liability for the debt. Taking subject to the loan, by itself, does not create that promise. Neither arrangement automatically releases the seller, overrides a due-on-sale clause or removes statutory anti-deficiency protections.

The due-on-sale clause

A due-on-sale clause can permit acceleration on transfer. Federal law protects specified transfers of residential property with fewer than five units, including certain transfers to a spouse or children, a relative after death, and an inter vivos trust where the borrower remains a beneficiary and occupancy rights are not transferred. Do not treat every trust transfer as exempt.

Priority and subordination

Priority generally follows applicable recording and notice rules, subject to statutory priorities such as property-tax liens and other exceptions. A subordination agreement can move a lien behind another; it does not change all other liens automatically.

The Homeowner Bill of Rights

For covered loans and borrowers, California's Homeowner Bill of Rights restricts specified foreclosure steps during review of a complete qualifying loan-modification application. A requested foreclosure-prevention alternative can trigger single-point-of-contact duties. Loan, property, borrower and servicer exceptions matter; not every pending application automatically stops every foreclosure.

Financing/Credit Laws

Truth in Lending and Regulation Z govern consumer-credit cost disclosure, APR, rescission in covered transactions, advertising, ability-to-repay standards, and integrated mortgage disclosures. The three-business-day right to rescind generally applies to certain nonpurchase transactions secured by a principal dwelling, not to a purchase-money mortgage used to acquire that home.

For closed-end credit advertising, stating a down payment amount or percentage, payment amount, number of payments, repayment period, or finance-charge amount can trigger additional disclosures. The advertisement then needs the required down payment, repayment terms, APR, and any increase after consummation. An APR can be stated without another trigger term, but advertised terms must actually be available.

TRID combines federal mortgage disclosures. After the six-item application is received, the Loan Estimate generally must be delivered or mailed within three business days. The creditor generally must ensure the consumer receives the Closing Disclosure at least three business days before consummation. A new waiting period is required only for specified major changes, not every correction.

RESPA focuses on settlement services. Section 8 prohibits kickbacks, referral fees, and fee splitting for unperformed settlement services, while permitting payment for actual goods, facilities, or services. Section 9 prohibits a seller from requiring the buyer to use a particular title insurance company. The integrated forms do not erase those separate RESPA duties.

ECOA and Regulation B prohibit discrimination on statutory bases, require notices of action taken, and govern appraisal-copy rights and application practices. The protected bases include race, color, religion, national origin, sex, marital status, qualifying age, public-assistance income, and good-faith exercise of protected credit rights. CFPB amended Regulation B in 2026, including its disparate-impact and discouragement provisions, without removing the statute's core prohibited bases.

The Fair Credit Reporting Act governs permissible use, accuracy, disputes, and notices involving consumer reports. HMDA requires covered institutions to collect and report specified mortgage data. The SAFE Act creates licensing or registration standards for mortgage loan originators. California usury law also matters, but exemptions for banks, credit unions, specified institutions, and qualifying real-property-secured loans made or arranged by licensed real estate brokers cover many transactions.

TILA and Regulation Z

Credit-cost disclosure, APR, covered rescission, advertising, ability to repay, and mortgage disclosure rules.

RESPA

Settlement-service practices, kickbacks, unearned fees, affiliated-business rules, servicing, and title-insurer choice.

ECOA and Regulation B

Equal access to credit, prohibited bases, application evaluation, action notices, and appraisal copies.

FCRA

Consumer-report access, permissible purpose, accuracy, disputes, and credit-report adverse-action disclosures.

HMDA and Regulation C

Collection and reporting of covered mortgage-lending data to support transparency and fair-lending oversight.

SAFE Act

National standards, NMLS records, and state licensing or federal registration for residential MLO activity.

Ability to repay

Reasonable, good-faith determination using verified and documented information for covered dwelling-secured credit.

Qualified mortgage

A defined loan category with product-feature and points-and-fees restrictions and specified legal protection.

Loan Brokerage

A DRE broker acts within loan-brokerage authority when soliciting or negotiating loans secured by real property, collecting payments, or selling secured notes under Business and Professions Code section 10131(d) and related provisions. The broker owes agency, disclosure, supervision, advertising, recordkeeping, and trust-fund duties in addition to federal lending rules.

Business and Professions Code section 10240 generally requires a written Mortgage Loan Disclosure Statement within three business days after a completed written application or before the borrower becomes obligated on the note, whichever is earlier. It must be complete, signed as required, copied to the borrower, and retained by the broker for three years. Federal disclosures can satisfy parts of the state framework in specified transactions, but only when statutory conditions are met.

Article 7 is often stated too broadly. Except for its disclosure-statement, late-charge, and prepayment provisions, DRE's compliance manual describes the regulated-loan limits as applying to bona fide senior liens under $30,000 and junior liens under $20,000 secured by a dwelling. For these regulated loans, costs other than actual title and recording charges cannot exceed 5% of principal or $390 when 5% is lower, and never more than $700.

Commission limits on those regulated loans depend on priority and term. A senior lien allows up to 5% for a term under three years and 10% for three years or more. A junior lien allows up to 5% under two years, 10% from two years to under three, and 15% for three years or more. These are Article 7 ceilings, not ordinary commission schedules for every real estate loan.

When a broker solicits private investors to fund or purchase secured notes, Article 6 and multi-lender rules can require lender or purchaser disclosures, suitability work, servicing records, and trust accounting. Compensation from every source must be disclosed as required. A salesperson performs loan-brokerage acts only through and under the supervision of the employing broker.

Borrower disclosure

Deliver the applicable complete disclosure by the earlier statutory deadline and retain the signed record.

Trust funds

Deposit, record, reconcile, and disburse borrower or investor money under California trust-account rules.

Compensation

Disclose the form, amount, and source when required and never charge amounts not incurred, paid, or reasonably earned.

Private lender

Treat the investor as a principal entitled to material loan, borrower, security, title, and risk information.

Advance fee

Mortgage advance-fee rules apply, and residential loan-modification advance fees are prohibited.

Advertising

Use required license and NMLS identifiers and avoid unsupported, misleading, or incomplete loan claims.

Article 7 commission and cost limits

Article 7's regulated-loan commission and cost ceilings generally cover dwelling-secured senior liens under $30,000 and junior liens under $20,000. A senior lien permits up to 5% commission for a term under three years and 10% for three years or more. A junior lien permits 5% under two years, 10% from two to under three years, and 15% for three years or more. Covered costs other than actual title and recording charges cannot exceed 5% of principal or $390 when 5% is lower, with an absolute $700 ceiling. Disclosure-statement, late-charge, and prepayment provisions have broader reach. Exemption from these small-loan ceilings is not exemption from all lending law.

Salesperson supervision

The employing broker remains responsible for licensed loan-brokerage activity and records.

Types of Loan Originators

A mortgage loan originator is generally an individual who, for compensation or expected gain, takes a residential mortgage loan application or offers or negotiates residential mortgage loan terms. Processing purely administrative information without offering or negotiating terms is different from origination, although independent-contractor processors face separate licensing rules.

California has more than one licensing path. A DRE broker or salesperson performing residential MLO activity needs an MLO endorsement managed through NMLS. A salesperson must also be properly employed, sponsored, and supervised by a DRE broker or corporation with the required MLO authority. The real estate license and MLO endorsement work together.

MLOs employed by companies licensed under the California Financing Law or California Residential Mortgage Lending Act obtain their individual MLO licenses through DFPI and NMLS. Employees of federally regulated depository institutions follow federal registration rather than the state-license path. NMLS is the common system, but the regulator and credential differ.

For a DRE individual endorsement, current requirements include an active real estate license, NMLS application, education, testing, fingerprints, credit authorization, and appropriate sponsorship for active status. The endorsement renews annually and expires December 31 if not renewed. DRE currently requires eight hours of NMLS-approved continuing education for annual individual renewal.

DRE brokers and salespersons who make, arrange, or service loans secured by residential one-to-four unit property under a DRE license must submit the RE 866 Mortgage Loan Activity Notification within 30 days after starting the activity. This notification is separate from obtaining the MLO endorsement.

DRE MLO

Real estate broker or salesperson with the required residential MLO endorsement through DRE and NMLS.

DFPI MLO

Individual licensed through DFPI and NMLS for a CFL or CRMLA employer.

Federally registered MLO

Qualifying employee of a federally regulated depository institution registered through NMLS.

Mortgage broker

Arranges a loan between borrower and funding source and may operate under DRE, CFL, or CRMLA authority as applicable.

Mortgage banker

Originates from its own funds or credit line and commonly sells loans into the secondary market.

Loan processor

Collects and organizes application information; clerical work alone is not offering or negotiating terms.

NMLS unique identifier

Permanent identifier used across licensing or registration records and required disclosures.

RE 866 notice

DRE activity notification due within 30 days after commencing covered residential mortgage-loan activity.